The current study attempts to analyze the relationship between cultural environment and foreign direct investment within the framework of transaction cost theory. Transaction cost theory gives the idea that differences in culture cause external uncertainty which results in higher transaction cost. The study is exploratory is nature and information is collected from secondary sources. The results show that different elements of culture influence the entry mode decisions of MNC’s. As cultural distance increases, MNEs face greater difficulty in attaining complete or truthful information about their foreign partners which increases transaction cost of operating in foreign environment. Multinational corporations should study and consider all the cultural elements before taking FDI decisions abroad because investing and functioning in culturally distant nation increases transaction cost of the MNE’s.